Why is Russian spending so weird?

 

Ah, the good ol' days in Moscow. The Russian transcription:

 "The name changes, the love remains." Photo source: AP, Dmitriy Serebryakov. 

The Russian economy is a tragedy leavened with tyranny. The economy collapsed along with the Soviet Union after 1991; see Figure 2 below. From 1990 to 1998, the economy shrank 43%, adjusting for inflation and changes in the exchange rate. Such contractions are rare in modern economies, but the operative word is “modern.”  Russian income did not return to its Soviet level until just before the global financial crisis of 2008. Then it collapsed again, by 8.5% in one year…and again in the pandemic year, by 2.7%…and again at the beginning of its invasion of Ukraine, by 2.2%.

The pandemic and war declines were modest, compared to those of the Soviet disruption and the 2008 financial shock. And Figure 2 does not show Russia’s workaround Western sanctions on oil in 2023. But while it has generally grown since 2008, its pace is much slower than in the catch-up decade before.  The pace was 9.5% per year from 1998 to 2008; and only 1.8% from 2009 to 2022. Today, the flight of technicians from a draft into the Ukraine war undermines Russia’s quest to regain its technological superiority of the 1950s, of the Sputnik years.

The Russian economy is not falling apart, but it is deeply troubled. Russia has little to offer other than oil and arms.  

Population decline aggravates the economic malaise (see Figure 1). While growth in the world population is slowing down, the world populace is still growing. Not in Russia. The population declined 3.5% from 1997 to 2008 – that is, throughout the ruble crisis – and since then has stagnated at a level of 144 million. Why?

Figure 4 shows the fertility rate, the number of births per woman. It has fallen for two thirds of a century.  So it is not just a problem of the transition, although the decline was especially sharp right after the breakup of the Soviet Union.  The conventional fertility rate needed to sustain the population is around 2.6, the replacement rate.  Going back to 1960, at least, it has never been that high in Russia. But the right replacement rate depends on the infant death rate. The more babies that die, the more babies we need to replace them to keep the population from shrinking. The infant death rate varies widely across countries, and not just because of income. What’s the right replacement rate for Russia?

The answer doesn’t just pop out of the World Development Indicators of the World Bank. The Indicators include “wanted” fertility rates for only a few countries.  The best of these for Russia seems to be Peru’s, so I include it in Figure 4. You can see that the shortfall in births is even larger when we use this more precise replacement rate.

The point is that Russia’s population is shrinking largely because Russian women don’t want babies.  Is this because they seek sober husbands, or careers of their own?

 

Slamming the brakes on spending

 

The dark trends in income and population must affect consumption. Russia is an upper-middle income country, like Kazakhstan. Their average incomes are similar: 27,584 international dollars for 2017 in Russia; 26,093 for Kazakhstan. (A 2017 international dollar adjusts for inflation and changes in exchange rates to show how many things can be bought at 2017 prices.) But over the long run, Russians spend far more of an additional dollar than Kazakhstanis do: .84 in Russa, but only .65 in Kazakhstan. The implied marginal propensity to save is only .16 in Russia and .35 in Kazakhstan.  Here, we interpret saving as including the forced saving of tax payments as well as private saving. 

The higher rate of saving an additional dollar in Kazakhstan partly reflects Asian habits of saving. Why do Asians save more? Interesting question. 

Over the long run, Russians spend more like Americans, even slightly more. The marginal propensity to consume in the US over the long run is .82; in Russia, .84.  The Russian newfound fondness for spending may result from 30 years of Western marketing in the land of Stalin.   

But more remarkable is that in the short run, the Russian consumes far less of a dollar than the American: .48 versus .82 (see Table 2). Perhaps lingering constraints on markets limit what the Russian can buy right away. She must plan her spending over time. Thus she saves in the short run and spends in the long.  

In the hypothetical case of zero income, the Russians would save (not spend) nearly 200 billion international dollars per year, perhaps by lending to future consumers (see Table 1).  This is consistent with the idea that Russians must plan their spending over time because of skimpy markets. Instantaneous gratification is not an option. Even Macdonald’s is gone.

In short, Russia is not a developing economy, but neither is it a developed one.  –Leon Taylor, Baltimore tayloralmaty@gmail.com

Table 1: Marginal propensity to consume in Russia over the long run

R Square	0.908
Standard Error	7.6E+10
Observations	33
ANOVA
	df	SS		MS		F		Signif. F
Regression	1	1.77E+24		1.77E+24		305.293		1.33E-17
Residual	31	1.79E+23		5.78E+21
Total	32	1.94E+24
	Coefficients	T-Stat	P-Val		Lower 95%		Upper 95%
Intercept	-1.9E+11	-3.480	0.002		-3E+11		-7.9E+10
GDP	0.836	17.473	0.000		0.739		0.934

 

 Table 2: Marginal propensity to consume in Russia over the short run

R Square	0.974
Standard Error	4.07E+10
Observations	33
ANOVA
	df	SS		MS		F		Signif. F
Regression	2	1.89E+24		9.47E+23		571.310		0.000
Residual	30	4.97E+22		1.66E+21
Total	32	1.94E+24
	Coefficients	T-Stat	P-Val		Lower 95%		Upper 95%
Intercept	-4.4E+09	-0.121	0.905		-7.8E+10		6.95E+10
GDP	0.482	10.125	0.000		0.385		0.579
Time	1.22E+10	8.837	0.000		9.39E+09		1.5E+10

 

 

Figure 1: Russian population, 1990-2022

 Figure 2: Russian GDP in international dollars, 1990-2022

 

 

Figure 3: Russian fertility rate, 1960-2021; and Peru wanted fertility rate, 1986-2012

 

 

Notes

For useful comments, I thank but do not implicate Annabel Benson.

All data are from The World Bank, www.worldbank.org

The data in the tables are from the World Bank’s World Development Indicators for 1990 through 2022. GDP is gross domestic product. Time gives the number of years that have passed since 1990, where Time = 1 for 1990. Consumption is personal consumption expenditures. GDP and Consumption are expressed in 2017 international dollars, using purchasing power parity.